After years of easy money and rapid growth, the FinTech bubble burst in 2022 amid economic challenges. A new monthly report takes a deep dive into FinTechs’ sometimes painful pivot to profitability, starting with BNPL.
After years of easy money and rapid growth, FinTechs find themselves in a starkly different business environment. A quick look at the dynamics of the past few years reveals just how much the situation has changed. In an interview with PYMNTS, Charlie Youakim, CEO of Sezzle, described the previous era as one of “crazy money” — and it is not hard to see why.
In 2021, FinTech global funding shot up to a record $131.5 billion, a 169% increase from 2020. This growth is remarkable, considering that FinTechs were thriving in 2020 too. That year, for example, PayPal’s market cap surpassed Bank of America’s, the second-largest lender in the U.S., making PayPal worth more than every American bank except J.P. Morgan Chase.
While PayPal is a bona fide — and profitable — heavyweight, Youakim explained that this was a time when investors and venture capitalists were seemingly throwing money at any idea, driven by a mindset that placed growth above profits.
“We had such a hot market for so long, it just became money chasing money; reason had left the building,” said Youakim, recalling that companies could raise up to $400 million despite having only $20 million in revenue.
Buy now, pay later (BNPL) companies were not immune to this crazy money. Youakim noted that it was not uncommon to see some firms paying $500 apiece to acquire a single customer.
Despite the growth, warning signs started flashing. Having survived the dot-com bubble of the early 2000s, Youakim started experiencing déjà vu in late 2020. As he worked remotely from Puerto Rico, he was struck by the amount of crypto money pouring into the real estate market. Something seemed off, he said, and this sense only grew as FinTechs’ veneer of business prosperity and success accrued.
Eventually, Youakim’s nascent concerns crystallized into the conviction that the market was inflated and a course correction was imminent. Sezzle started strategizing on how to pivot from acquiring as many new customers as possible to becoming profitable.
Changing course and focusing on profits required tough calls. As Sezzle realigned, the company realized that it faced some internal economic challenges. Youakim said this meant that it had to reprice some deals with larger merchants, which was difficult and not always successful. Some deals fell apart.
The company also took a hard look at its portfolio and, over a span of many months, cut cohorts that were unprofitable due to processing costs and a lack of purchase frequency. In addition, Sezzle began to encourage customers to pay with automated clearing house (ACH) bank transfers instead of cards, as the former was cheaper. This was an easy change, Youakim said, in contrast to much harder decisions.
“We had to do layoffs. … I’m not proud of that. It’s the only time I’ve ever done it in my career, and I don’t ever want to do it again,” he said, adding that the company also disbanded its non-North American businesses.
Although these decisions were challenging, they proved effective. In the last two quarters of 2022, Sezzle posted a profit after years of losses. Youakim credited this to being early in realizing that changes were needed and then changing business operations accordingly.
For other FinTechs pivoting to profitability, Youakim had some advice. He encouraged companies to be the biggest critics of their own businesses. This might be an unfamiliar approach to many, he said, but companies need to take a clear-eyed look at run rates and burn rates. This is necessary because the pendulum has swung toward profitability.